The best cash investment rates deliver far superior returns

byThe InvestoronMarch 29, 2010

Want to get the best returns possible from holding cash? Then you have to chase the best cash investment rates from the banks.

The best interest rates often only apply for a year, before the banks quietly reduce the rate, hoping you won’t notice. This means you have to move your money every year to keep it invested at the best rate possible.

It’s a hassle, but being an interest rate tart like this can be very profitable.

In the ten years from 2000-2010, a UK saver getting the best cash investment rates every year by moving their money between accounts would have seen an average return of 5% a year – or 70% over the decade – according to recent research from Defaqto.

That means investing at the best cash rates was almost 30% more profitable than the 10-year return if you’d stayed in the average savings account.

An easier way to get the best rate

Admittedly, chasing rates can be tiresome – it’s pretty tedious having to regularly open a new account in order to invest cash for the best possible return.

Happily though there’s an account that does the work for you in the UK called the Investec High 5. (Update: They’ve just closed the account to new customers!)

The High 5 account always pays the average of the top five best rates in the UK in any particular week, and Investec is a respectable FSA-regulated bank, so you can put in £50,000 knowing the government will compensate you if the bank gets into trouble.

The downside is you need to have a minimum of £25,000 to qualify for the account, and you have to give 90 days notice to withdraw your money.

If you want to make sure you’re getting the best cash investment rates without checking the comparison tables every week, it could be the perfect option.

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@Sam, I’ve mentioned before that 4.1% isn’t a great rate versus inflation as you know (what, 1% real return?) and as you’ll be withdrawing all the income to live on when you retire, your capital sum generating the income will be going down in real terms so you’ll be getting poorer every year.

This wouldn’t matter if you were 70, but I seem to recall you’re looking to retire in your mid-40s. You could easily live for another 40-50 years, which would easily halve the value of your capital and income in real terms.

If you’ve got dividends and other income tucked away that you’re relying on to keep up with inflation, then is it really true to say you plan on retiring on the cash alone? 😉

Wow, I am with LLC. How come there is not a program like this in the states? I am jealous of those who have £25,000+ invested in this program. Too bad they locked it to new investors.
.-= Money Funk on: Great Giveaways by PF bloggers =-.

@LeanLifeCoach @MoneyFunk – I guess it’s too expensive. Generally banks raise their savings account interest rates when they want to increase their loans or to fund some other business, or to acquire more customers who they hope to sell other financial products to at a greater profit. When they’ve got the money they originally targeted, they lower the rates again. Raising rates reduces already slender margins, so few banks top the ‘best buy’ tables for long.

With this High 5 account, Investec was effectively paying over-the-odds to savers, with the rates being driven by the policies of other banks. It sounds like hair-splitting over a few tenths of a percent, but when you’re dealing with hundreds of millions or even billions and you need to provide rock solid security and money at three months notice, there’s only so much risk a bank can take. I suspect in the end the account got too popular, and they ran out of ways to profitably re-invest savers’ money.

I wouldn’t see why a US bank couldn’t copy the concept, but eventually they’d hit the same problem I suppose.

US inflation is 2.1%-ish now, but was 2.72% as recently as December. And anyway, if you’re spending the income your capital is still deflating by 2% a year. (Spend it all now before it loses its value! Party at Sam’s! 🙂 )